Consumers should combine drawdown and annuities for a more sustainable retirement income, the UK’s actuaries have advised.

In a policy briefing titled ‘Can we help consumers avoid running out of money in retirement?’, the Institute and Faculty of Actuaries (IFoA) pointed out that twice as many consumers now opt for drawdown products than annuities, and many do so without taking financial advice.

The IFoA calculated that the typical 65 year old would need to take their pension at a flat rate of 3.5 per cent in order to have a “high likelihood” of a sustainable income in retirement.

By comparison, a typical 65 year old could expect to receive 4.5-5.5 per cent from a level annuity.

However, by combining drawdown with annuities, consumers can “reduce the risk of a low income due to living longer than expected or adverse market conditions”, the report concluded.

“We are seeing many more consumers moving towards products that don’t offer any income guarantee,” said John Taylor, incoming president-elect at the IFoA.

“There is a real concern that these consumers may be at risk of running out of money in retirement and that they do not understand this risk because of a failure to take regulated financial advice.”

Taylor added that IFoA modelling found that consumers can improve their retirement funds by using drawdown until they are in their early-70s, then purchasing “some element of guarantee” with their remaining funds.

“This would be reliant on them withdrawing a sustainable amount during those early years, and our modelling suggests a rate of 3.5 per cent per annum is highly likely to be sustainable,” he added.

“Consumers in drawdown are managing longevity risk themselves and it is impossible for anyone to judge exactly how long they are going to live and therefore how long they need money to last,” said Taylor.

“While those who take an annuity at retirement will have a greater level of certainty, they will also have reduced flexibility over how much of their income they can take. Using drawdown followed by an annuity allows flexibility during the earlier stages of retirement and longevity protection at the end.”

Kathryn Gaw

Kathryn Gaw is a financial journalist based in Belfast, Northern Ireland. She has been writing about personal finance and investment trends for more than a decade, and her work has been featured in the Financial Times, City A.M., the Press Association, and The Irish Independent, among many other publications.

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